Patent trolls spell trouble for America’s economy

This article originally appeared on Reuters.com on November 18, 2013. Read the original here.

Our nation’s founders incorporated the concept of individual property rights — including intellectual property rights — into the Constitution because they knew that these rights spur innovation and help promote economic growth. However, patent assertion entities (PAEs), otherwise known as “patent trolls,” inhibit the innovation and economic growth that patents typically foster. Even more alarming, with the creation of government-sponsored patent trolls (GSPTs) — which are financially backed by a national government — patent trolls have gone global.

Patent trolls, which can either be companies or government-sponsored organizations, are entities that buy large patent portfolios — not to use the patents to create new products, but to generate revenue by filing meritless lawsuits against people who have allegedly infringed on their patents. These tactics are aggressive and often unethical, and the suits rarely have the evidence needed to win at trial. Defendants prevail in 92 percent of adjudicated patent troll-initiated lawsuits. Unfortunately, 86 percent of these suits settle out of court because patent trolls tend to target smaller companies and end users, which can rarely afford the lengthy litigation associated with these types of suits.

For example, Innovatio IP, a notorious patent troll in Illinois, claimed its portfolio included patents covering Wi-Fi implementation — the establishment of Wi-Fi access in public places such as coffee shops and hotels. It started filing lawsuits against large franchises such as Cosi, Caribou and Panera, and then sued small mom-and-pop coffee shops throughout Illinois.

In another case, the patent troll MPHJ Technology Investments sent letters to hundreds of small and medium-sized businesses across the country, including two non-profits, telling them that they violated a patent if they used a type of scanner typically found on office copiers. Providing no specific evidence of patent infringement, MPHJ demanded $900 to $1,200 per employee for a license to use the patent. For some of the small businesses that were targeted, it made more financial sense to pay the erroneous license fee than to fight the troll in court.

Patent trolls have such troubling implications for America’s economy that they have caught the attention of the White House, which in June published a report detailing the impact. According to the report, in 2011 alleged infringers paid patent trolls $29 billion — money these enterprises could have invested in innovation and job creation — for an estimated loss of wealth of $300 billion over the previous four years.

In response to these losses, on Oct. 23, House Judiciary Committee Chairman Bob Goodlatte (R-Va) introduced the Innovation Act, a bill that would update the American Invents Act to better protect legal patent holders. The bill would allow the manufacturer or supplier of a product to intervene on behalf of customers who find themselves targeted by a patent troll. It would also deter frivolous lawsuits by requiring the losing party to pay the other party’s legal fees. The bill has bipartisan support, with sponsors and co-sponsors ranging from Virginia’s Goodlatte and Utah’s Jason Chaffetz to Peter DeFazio of Oregon.

Like their private sector domestic counterparts, Government-Sponsored Patent Trolls, in countries such as France, South Korea and Taiwan, also collect patent portfolios while creating nothing. What distinguishes them from domestic patent trolls is the financial backing of a national government and the potential for protectionism. One Taiwanese GSPT called Industrial Technology Research Institute (ITRI) currently owns over 18,000 U.S. patents. It has already assisted in the creation of more than 225 companies, which will inevitably compete against private enterprises that lack the backing and clout of the Taiwanese government. Over the past several years, ITRI has asserted more than 20 patents in the Eastern District of Texas U.S. District Court, which since 1999 has distinguished itself as a friendly jurisdiction for patent trolls. In 2012, 1,266 patent cases were filed in the Eastern District — the most of any jurisdiction in the country.

While some GSPTs eschew protectionist impulses, others take a more nationalist approach. The French patent troll France Brevets has stated plans to “defend the rights of their patents” and invest in intellectual property to help French companies monetize their technology, favoring its nation’s companies over foreign competitors.

But even those patent trolls that do not embrace protectionism are extensions of their respective governments, and can take advantage of that government’s regulatory preferences and financial resources. Whenever the state — generally the enforcer of patent law — is also a patent holder, a conflict of interest arises, which could lead to state interests superseding market or public interest.

There are a number of trade remedies the U.S. could employ to discourage international patent trolls and defend our economic interests. The U.S. government could resurrect a previously-tabled proposal to enhance transparency requirements for state-owned enterprises at the next round of Trans-Pacific Partnership negotiations (regarding U.S.-Latin America-Asia trade). It could insist on similar transparency requirements with the European Union. These requirements would allow U.S. businesses to distinguish state-owned enterprises (SOEs), including state-owned patent trolls, from their private counterparts. Once identified as state-owned, the patent trolls would be subject to more restrictions than a private company like Google or Apple.

With high U.S. unemployment and the global economy growing at an anemic rate, using trade remedies to counter domestic and international patent trolls is a way to strengthen innovation and create jobs.

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